CERTIFIED PUBLIC ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS

Tax Credits for Building Renovations

According to the Internal Revenue Service, the rehabilitation tax credit applies to costs for rehabilitation and reconstruction of some buildings. The credits do not apply to new construction or additions,...

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According to the Internal Revenue Service, the rehabilitation tax credit applies to costs for rehabilitation and reconstruction of some buildings. The credits do not apply to new construction or additions, but do encompass renovations, restoration and reconstruction. The percentage of rehabilitation costs eligible for the tax credit range from 10 percent to 20 percent, depending on the building’s age and status as a historic structure.

Rehabilitation

Increased tax credits exist for buildings undergoing renovation because of damage from a natural disaster in federally declared locations. For example, the GO Zone tax deduction increase applies to buildings damaged by Hurricane Rita, Hurricane Wilma or Hurricane Katrina. The repairs to the structure must fall under IRS rehabilitation guidelines to qualify. Credits can expire within one or several years, so it’s important for small business owners to stay up to date on IRS guidelines and pending tax legislation.

Historic Restoration

The Federal Historic Preservation Tax Incentives program provides commercial and residential property owners with tax credits for restoring and repairing historic structures. By meeting specific standards for rehabilitation, property owners can get up to 20 percent in federal tax credits. The property must receive certification as a certified historic structure to be eligible. Typically, this means the property is listed in the National Register of Historic Places or is part of a certified historic district.

Energy

The Energy Policy Act contains several tax incentives for residential and commercial property owners conducting renovations that increase energy efficiency or sustainability. Increasing energy efficiency with improved insulation, heating and cooling systems, windows and power sources offer opportunities for several tax deductions. Making these changes also saves on monthly energy costs, an attractive feature for prospective owners. According to the U.S. Department of Energy, commercial business owners receive tax savings for installation of energy-saving lighting systems, heating and cooling systems, water heaters and the building envelope. Typically, deductions must result in a 50 percent or higher annual reduction in energy costs. The IRS calculates the deduction using a set dollar amount per square foot of improved space.

State Specific

Tax credits for revitalizing a building or property also exist at the state level. These tax deductions and write-offs change more frequently than federal guidelines. State credits often exist to encourage small business owners to improve or repair properties to revitalize a surrounding area. Use state tax credits in combination with applicable federal incentives to maximize the tax savings on a building renovation.

Restrictions

It is worth noting that businesses operating under tax-exempt status with the IRS face certain restrictions when claiming deductions for property renovation. IRS guidelines specifically state that furniture, building additions, landscaping and acquisitions are not qualified expenses and are not eligible for rehabilitation credits. For property owners pursuing tax deductions for renovating a historic structure, the structure must be certified as historic before taxes are filed to claim the credit.

Author: Clare Archer

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